OCTOBER 04, 2020
Operating foundations are the best choice if you have a very specific philanthropic goal that few—if any—charities are fulfilling. With this option your foundation funds its own charitable services and programs. That means you will likely make only minimal grants to outside organizations.
An operating foundation carries a number of characteristics and requirements:
- It must spend at least 85 percent of its adjusted net income or its minimum investment return directly on its own activities.
- It is exempt from minimum charitable distribution requirements.
- It provides tax deductions for cash contributions up to 60 percent of a donor’s adjusted gross income (compared to the typical limitation of 30 percent for non-operating foundations).
- It may receive distributions from independent non-operating foundations and is not subject to the public support test.
Examples of operating foundations
Operating foundations are engaged in a wide variety of activities. Among the better-known operating foundations:
- J. Paul Getty Trust: Operates the J. Paul Getty Museum in Los Angeles and also supports a multi-faceted arts program that includes conservation, research, publications, and training.
- Casey Family Programs: Provides direct services and conducts research on child and family well-being.
- Open Society Institute (Baltimore): Runs programs in criminal justice, youth development, and health.
- Broad Art Foundation: Created in 1984 to lend works from its 700-piece collection without charging fees, and serve as a study center for art professionals, collectors, and students.
- Henry J. Kaiser Family Foundation: Conducts health research.
- Carnegie Foundation for the Advancement of Teaching: Funds both research and programs promoting improvement in education.
While all the above operating foundations reflect their donors’ core interests, Liberty Fund is an operating foundation created to nurture a distinct ideology. Its programs are intended “to enrich understanding and appreciation of the complex nature of a society of free and responsible individuals and to contribute to its preservation.” Founded in 1960 by Indianapolis businessman and attorney Pierre Goodrich, Liberty Fund reflects its donor’s deep interest in public affairs and his love for the Great Books.
Although it functioned as a grantmaking foundation in its early years, Liberty Fund converted to an operating foundation in 1979. Since then it has sponsored its own programs, including more than 3,000 conferences for scholars and students on topics such as “Liberty and Markets in the Writings of Adam Smith” and “Shakespeare’s Conception of Political Liberty.”
Liberty Fund has also published over 400 titles in both print and e-books, most of them exploring “the interrelationship of liberty and responsibility in individual life, society, and governance.” In addition to the conferences and books, Liberty Fund maintains a free online library of important writing on individual liberty, limited government, and free markets.
Donors with missions as distinct and specific as that of Pierre Goodrich may well see a private operating foundation as their most effective vehicle for philanthropy.
Operating foundations and donor intent
In protecting donor intent, operating foundations have one obvious advantage. Because these organizations fund, design, and administer their own programs, they have direct control over how their funds are spent, side-stepping grantees who may fail to adhere to the terms of a grant agreement.
But operating foundations are not foolproof. They are subject to many of the same problems as non-operating foundations, including wayward board or staff members and mission creep over time. While an operating foundation gives you more immediate control over how your charitable funds are directed, it cannot guarantee fidelity to your intent in perpetuity.